Bonds and Why You Will Get Your Face Ripped Off

Phil Grande
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Posted: Nov 08, 2010 9:02 AM

The Herd Mentality

Always bet against the “herd” and you will win. The Gold “herd” has shifted to the same side of the boat, and when the financial wave of destruction hits the boat, it will be swamped, drowning the “herd”. The wave is coming. When will it happen? It’s hard enough to time the market, never mind a certain wave. I will have to pass on the wave speculation, but it’s enough to know it will happen.

And talk about a “herd” mentality… More money has recently flowed into U.S. bond mutual funds than in the previous 10 years combined. As of June 2010, more money flowed into bond funds than into stock funds for the last 30 months in a row. This means not only are interest rates low because global governments are stimulating the world economy, but the “herd” of retail investors are dumping stocks and buying bonds. Remember, the “herd” is always wrong.

The true sign of a professional investor is the ability to stay above the hype. One must be able to see through the cheerleading of, for example, CNBC’s Larry Kudlow, and their other bubble master hosts and guests, who have mastered the art of reading a teleprompter, since the skill of picking good stocks continues to elude them. A good example of the hype is when Kudlow tried to embellish the retail numbers, only to be embarrassed when his own guest said “Larry the increase in revenue over the same quarter last year was so small, it was the equivalent of about 2 more pair of socks, give me a break Larry!” .Kudlow grumbled under his breath then changed the subject.

Going all the way back to the most infamous “popping” of the tulip bubble of the 1600’s, to the olive oil bubble of the 1920’s, to the tech bubble of 2000, and to the real estate and lending bubble of 2008, the “herd” has always been told, “It’s different this time.” The “herd” hears this again today, “it’s different this time” with the help of the bubble masters at CNBC.

Prices continue to keep rising until they just can’t rise anymore, and, like all bubbles, they are not sustainable. The “herd” always leverages themselves to buy even more, thus, going deeper into debt. They buy on margins supported by fundamentalists provided by hosts of CNBC and their guests. Instead of taking the role as an activist investor who reads charts, the “herd” relies on 3 month old information.

Soon, like all bubbles, bond or stock, they “pop” and the “herd” loses again. They don’t even take time to lick their wounds before they are right back at it again, looking for that next hot asset class and being convinced by their financial planner and CNBC that, “It’s different this time.” After all, Bernanke is buying them, so what better endorsement is there than that of the government, says the planner to his “herd” bonds are safe.

“What are you nuts?”

The fraud in the bond market is that the U.S. government is the seller of bonds and the “herd” can hold their bonds to maturity, and if there is no default, they can recover 100% of their money. However, the “herd” will get their faces ripped off as interest rates go up as a result of inflation. “Inflation?” you say. Of course, the government lies about inflation with their phony CPI and PPI reports.

Gold prices are the best indicator of inflation, but the financial terrorists on CNBC will dismiss that scenario, and say that the dollar is not going up, but rather the dollar is going down. Don’t be fooled. There is one sign of inflation they can’t dismiss and that is the printing of money.

The money supply is increasing every minute of the day as the printing presses run non-stop. Remember, the idea behind the stimulus is to get activity in the economy going again, and along with that increased activity are rising interest rates. The “herd”, with long term bonds, is being lead to the slaughterhouse and they don’t even realize it.

Remember, the relationship between bonds and stocks. When interest and inflation rates go up, bond yields rise and stock prices fall. All you hear from planners is to be diversified. “What are you, nuts?” They always want you to hold both stocks and bonds, which is nuts. Diversification like that will put you into the poor house. When interest rates rise, both bonds and stocks go down because inflation is bad for both. Stocks go down when the economy goes into a recession. Interest rates fall in a recession, which is bullish for bonds, so they should rise.

However, a recession may be bad for high-yield bonds whose issuers may not be able to make their interest payments in an economic downturn, so high-yield bonds decline. State tax receipts also decline in a recession, raising fears of default in lower-quality municipal bonds, so those can decline, too. On the other hand, U.S. Government debt and high-quality bonds issued by blue chip companies are considered safe havens in a recession and may rise.

Rather than being a member of the “herd” and being led to slaughter, why don’t you join me and the Gang at www.philsgang.com Take control and learn how to be an activist trader, where you influence the results of your investments and trades, instead of giving your money to a dope and closing your eyes and hoping for the best.

“What are you nuts?”